source income is derived from real property located in the United States. See sec. 882(d)(1). The Commissioner has ruled that a foreign corporation may not make such an election for a taxable year in which it does not derive income from real property in the United States. See Rev. Rul. 91– 7, 1991-1 C.B. 110; see also sec. 1.871-10(a), Income Tax Regs.

For purposes of section 882(a)(1), a foreign corporation generally determines its taxable income by including in its gross income only its effectively connected income. See sec. 882(a)(2). Whether the foreign corporation may claim deductions against its gross income to arrive at taxable income depends on section 882(c)(2). Under that section, a

foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. * * *

B. History of Relevant Provisions

1. Predecessors to Section 882(c)(2)

We trace section 882(c)(2) to its origin in section 233 of the Revenue Act of 1928. There, Congress provided:

SEC. 233. ALLOWANCE OF DEDUCTIONS AND CREDITS.

A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this title only by filing or causing to be filed with the collector a true and accurate return of its total income received from all sources in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.

Congress enacted section 233 of the Revenue Act of 1928 in the same form as the related bill had been introduced in the House of Representatives. See H.R. 1, sec. 233, 70th Cong., 1st Sess. (1927). The committee reports underlying this enactment do not explain the section's intent or breadth.

Section 233 of the Revenue Act of 1928 was reenacted verbatim in the Revenue Act of 1932, 47 Stat. 230, the Revenue Act of 1934, ch. 277, 48 Stat. 737, the Revenue Act of 1936, ch. 690, 49 Stat. 1717, and the Revenue Act of 1938, ch. 289, 52 Stat. 531. The same provision also was codified verbatim in the 1939 Code, 53 Stat. 79, except that Congress placed

the word "chapter" in the two places where the word "title" had appeared in the previous statute.10 Compare section 233 of the 1939 Code with section 233 of the Revenue Act of 1938.

In the 1954 Code, Congress recodified section 233 of the 1939 Code in former section 882(c)(1), 68A Stat. 282, with slight modifications. Section 882(c)(1) of the 1954 Code provided:

SEC. 882(c). ALLOWANCE OF DEDUCTIONS AND CREDITS.

(1) DEDUCTIONS ALLOWED ONLY IF RETURN FILED.-A foreign corporation shall receive the benefit of the deductions allowed to it in this subtitle only by filing or causing to be filed with the Secretary or his delegate a true and accurate return of its total income received from all sources in the United States, in the manner prescribed in subtitle F, including therein all the information which the Secretary or his delegate may deem necessary for the calculation of such deductions.

The House committee report underlying the 1954 Code stated as to this action: "Subsection (c), relating to necessity for filing of returns by foreign corporations in order to secure allowance of deductions and credits, is, in substance, identical with sections 232, 233, and 234, 1939 Code." H. Rept. 1337, 83d Cong., 2d Sess. A246 (1954); see also S. Rept. 1622, 83d Cong., 2d Sess. 417 (1954) (same statement except omits the words "and credits").

Section 882 of the 1954 Code was next amended in the Foreign Investors Tax Act of 1966, Pub. L. 89-809, sec. 104(b)(1), 80 Stat. 1555. A stated purpose of that act was "To provide equitable tax treatment for foreign investment in the United States". Foreign Investors Tax Act of 1966, 80 Stat. 1539. To that end, Congress renumbered section 882(c)(1) of the 1954 Code with slight modification as section 882(c)(2) and added a new section 882(d). Foreign Investors Tax Act of 1966, sec. 104(b)(1), 80 Stat. 1556. As to the first action, the House committee report stated:

10 The 1939 Code was approved and published on Feb. 10, 1939. See 53 Stat. iii. The 1939 Code "is an enactment without change of the 1939 edition of the Codification of Internal Revenue Laws prepared by *** the staff of the Joint Committee on Internal Revenue Taxation, with the assistance of the Department of the Treasury and the Department of Justice." Id. The underlying bill was introduced in the House Committee on Ways and Means on Jan. 18, 1939. See id.

Deductions and credits allowed only if return filed.

Paragraph (2) of section 882(c) continues the substance of the rule contained in section 882(c)(1) of existing law that a foreign corporation is to receive the benefit of the allowable deductions only by filing a true and accurate return of its total income (including income subject to tax under section 881(a)); a technical amendment has been provided, however, to make clear that the return must also include the income derived from sources without the United States which is effectively connected with the conduct of a trade or business within the United States. This rule has also been extended to apply to credits against tax, such as the foreign tax credit, other than the credit provided by section 32 for tax withheld at the source or the credit provided by section 39 for certain users of gasoline and lubricating oil. As so amended, section 882(c)(2) is consistent with section 874(a) of the code, as amended by section 3(d) of the bill. [H. Rept. 1450, 89th Cong., 2d Sess. 90 (1966).]

As to the addition of section 882(d), the Senate committee report stated:

As a general rule, the bill provides that income of a nonresident alien or foreign corporation will be subject to the flat 30-percent (or lower treaty) rate if it is not effectively connected with the conduct of a trade or business within the United States. The regular individual or corporate rates apply to income which is effectively connected to the conduct of a U.S. trade or business. However, the foreigner may elect to treat real property income as if it were income effectively connected with a U.S. business. This is to permit the deductions attributable to this real property income to be deducted from it. *** [S. Rept. 1707, 89th Cong., 2d Sess. 19 (1966), 1966-2 C.B. 1059, 1071.]

Compare id. at 26, 1966–2 C.B. at 1076-1077, where the Senate committee noted as to nonresident aliens owning property in the United States that

Taxing income on real property at a flat 30-percent rate without the allowance of allocable deductions-which in the case of this type of income may be relatively large-may result in quite heavy tax burdens on this type of income. Your committee agrees with the House that the law in this area should be clarified and doubts whether the disallowance of deductions in such cases is appropriate. Moreover, the disallowance of deductions in such cases would tend to discourage foreign investment in U.S. realty.

2. Section 217 of the Revenue Act of 1918

a. Overview

Ten years before the Revenue Act of 1928, 45 Stat. 791, Congress enacted in section 217 of the Revenue Act of 1918, ch. 18, 40 Stat. 1069, a provision applicable to nonresident

aliens. This provision was substantially similar to section 233 of the Revenue Act of 1928, except that section 217 used the words "nonresident alien individual" rather than the words "foreign corporation". Section 217 of the Revenue Act of 1918 provided:

NONRESIDENT ALIENS-ALLOWANCE OF DEDUCTIONS AND CREDITS.

Sec. 217. That a nonresident alien individual shall receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits: ***

Section 217 of the Revenue Act of 1918 was reenacted in subsequent revenue acts, see, e.g., Revenue Act of 1924, ch. 234, sec. 217(g), 43 Stat. 275; Revenue Act of 1926, ch. 27, sec. 217(g), 44 Stat. 32; Revenue Act of 1928, ch. 852, sec. 215(a), 45 Stat. 848; Revenue Act of 1932, ch. 208, sec. 215(a), 47 Stat. 229, and was codified in the 1939 Code as section 215(a), ch. 2, 53 Stat. 77. It was recodified in the 1954 Code as section 874(a), 68A Stat. 281. Section 874 of the 1954 Code was identical in substance with sections 215 and 216 of the 1939 Code, H. Rept. 1337, supra at A245, and is virtually identical to section 882(c)(2) except that the latter section uses the words "foreign corporation" instead of the words "nonresident alien individual".

From the outset, the Secretary interpreted section 217 of the Revenue Act of 1918 as providing that a nonresident alien was allowed deductions upon the alien's filing of a true and accurate Federal income tax return and that the alien's tax liability would be assessed without the benefit of deductions if the Commissioner had to prepare a substitute return for the alien. That interpretation was set forth in Article 311 of Regulations 45 as follows:

Art. 311. Allowance of deductions and credits to nonresident alien individual.-Unless a nonresident alien individual shall render a return of income as required in article 404 [i.e., "a full and accurate return on form 1040 (revised) or form 1040 A (revised) of his income received from sources within the United States, regardless of amount"], the tax shall be collected on the basis of his gross income (not his net income) from sources within the United States. Where a nonresident alien has various sources of

income within the United States, so that from any one source or from all sources combined the amount of income shall call for the assessment of a surtax, and a return of income shall not be filed by him or on his behalf, the Commissioner will cause a return of income to be made and include therein the income of such nonresident alien from all sources concerning which he has information, and he will assess the tax and collect it from one or more of the sources of income within the United States of such nonresident alien, without allowance for deductions or credits. * * *

b. Relationship to Former Section 233

The Court of Appeals for the Fourth Circuit has observed that Article 311 of Regulations 45 contains the Secretary's longstanding construction of section 217 of the Revenue Act of 1918. See Blenheim Co. v. Commissioner, 125 F.2d at 910. That court has stated that Congress is presumed to have included that construction in section 233 as enacted as part of the Revenue Act of 1928 and as later reenacted. See id. (citing Brewster v. Gage, 280 U.S. 327 (1930); Morgan v. Commissioner, 309 U.S. 78 (1940)).

3. Section 235 of the Revenue Act of 1928

Section 235 of the Revenue Act of 1928, 45 Stat. 849, was a predecessor to section 6072 and provided the due date for filing the Federal income tax return of a foreign corporation without an office or place of business in the United States. Section 235 of the Revenue Act of 1928 provided:

SEC. 235. RETURNS.

In the case of a foreign corporation not having any office or place of business in the United States the return, in lieu of the time prescribed in section 53(a)(1), shall be made on or before the fifteenth day of the sixth month following the close of the fiscal year, or, if the return is made on the basis of the calendar year then on or before the fifteenth day of June. If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall be made by the agent.

Section 235 of the Revenue Act of 1928 was reenacted verbatim in the Revenue Act of 1932, 47 Stat. 230. Compare section 235 of the Revenue Act of 1932 with section 235 of the Revenue Act of 1928.